Tax audit

What is a tax audit/ Vat audit?

Tax Audit is one of the compliance checks or to verify a person’s VAT liability is accurate by way of examining various records which are maintained by the taxpayer. It is basically a government’s assessment of a company about their responsibility as a taxable entity. The government also assesses a company whether they are following certain responsibilities that apply to their business as per the tax laws (VAT Law, Excise Tax Law, etc.).

This kind of audit is conducted by the FTA to ensure that every liability is paid and every tax due is collected and given to the government within the timeframe given.

A tax audit may be carried out at the taxable person’s business premises known as ‘field tax audit’ or in the offices of the FTA. Generally, prior notification of an audit will be given to the taxpayer.

Tax audit procedure

The FTA authorities will check the returns and other details. There need not be a specific reason for the FTA to conduct an audit of a company. They can conduct it for any reason or whenever they want. A notice will be issued to the company, at least five days before the scheduled audit date. It will contain details, such as the audit schedule, place, involved parties, reason (if anything particular), etc. The auditor/s and the company will meet at the scheduled place at the scheduled time and the process will begin. The auditor may ask for business records, in original and/or copies, and take samples of goods and other assets as available at the place at the time.

The tax audit is required to be conducted during the official FTA working hours, unless the Director-General decides to conduct the audit of a business outside regular hours, in an exceptional case. The Company subject to a tax audit, along with their legal representatives and tax agents, are required to provide full assistance to the auditors performing their task. If anything, suspicious is found in the result of the audit that might impact the tax return, the authority may order a re-audit for further analysis. The audited person has the right to ask for the notification copy and related documents and be present during the auditing procedures that are conducted outside of the official places.

What is the timeline for Tax Audit?

All the VAT registered businesses will not be audited and also there is no fixed frequency in which the tax audit will be conducted. From time to time, the FTA will select the businesses who are required to be audited. The decision to audit the businesses completely is at FTA’s discretion. The following are some of the factors which are considered in selecting the business for tax audit

For example, a large business selling a high volume of goods and having a poor compliance record is more likely to be subject to a tax audit than a small business with a strong compliance record, as the risk to the tax revenue is greater.

The FTA will usually inform the taxable person in the question of tax audit 5 business days in advance. However, in certain exceptional cases like suspected tax evasion, or if there is a reason to believe that notifying would hinder the conduct of the audit, no notice of tax audit will be given.

Where the tax audit is conducted?

Tax Audit is conducted at the taxable person’s place of businesses or in some cases at FTA’s office. If the audit takes place at the taxable person's place of business, it will usually be during the FTA’s normal business hours.

How the tax payer responds to tax audit notice?

The businesses which are subject to an audit (including their tax agent, or legal representative), must facilitate and provide the required assistance to the tax auditor to carry out the audit in a smoother manner. The following are some of the actions that the taxpayer should ensure on receiving the tax audit notice:

In the event of failure to provide the required records or assistance in conducting the tax audit, applicable penalties may be levied on the taxpayer.

Findings and courses of action after tax audit

On completion of the audit, the FTA will communicate the results of the audit to the taxable person. If the conclusion of the audit leads to the determination of any of the following cases, then tax assessment will be issued

What Can You Do to Be Prepared for the Audit?

System set up

A tax consultant can assist the company to get organized so that when your company is requested for an audit from FTA, you are all set up to face the tax auditors and assist the company to collate the details and documents to be furnished to the auditors. VAT Health Check is advisable for all registrants either concurrently or once in an year.

Review of the system

Since tax has been announced to commence in the UAE on the first day of 2018, companies have ensured that every department is ready to face a new era. One of the most important items to be updated is the accounting software which is compatible or acceptable with the provisions of FTA. Same should comply with the laws regarding VAT accounting.

A review of the systems will ensure that there is no inconsistency with the recorded transactions.

Review of Calculation of Tax

It is important that companies ensure that they are complying with the laws by checking that the calculation of both output and input taxes are correct. As a basic rule, the tax rate is at 5% only. Any goods or services that fall under zero-rated and exempted tax should be treated as it is with documents for support.

Review of VAT Returns

A tax consultant will review the VAT returns that need to be filed by companies to ensure that returns will be prepared in the correct manner with the values properly recorded in the right boxes and the needed information are filled in and also make sure that it is filed within the timeframe provided by FTA.

Review of Payment of Tax Due

The correct amount of tax due should be paid on or before the due date. A tax consultant will ensure that you are not missing the timeframe of tax payment to the government

Consequences of not adhering to VAT laws and rules

It is expected that over time most entities registered for VAT will be subject to an Audit. Non-compliance with tax laws is likely to result in penalties and loss of reputation. A preliminary internal tax review by VAT experts before the actual Audit ensures that an organisation is: